Kings Business School, Kings College

King’s Business School, King’s College London Cover sheet for Period 2 Alternative Assessments Candidate

ID:

A29954

Module

Code:

5SSMN229

Module

Name:

Management Accounting

Word Count:2,000

Please complete the above candidate and module information and provide your answers below.Where applicable students should clearly state the question(s) they are answering (e.g. Question 1, Part A) so it can be clearly identified for markers.

DECLARATION BY STUDENT

This assignment is entirely my own work.I understand what is meant by plagiarism/collusion and have signed at enrolment the declaration concerning the avoidance of plagiarism/collusion.I understand that plagiarism/collusion is a serious examinations offence that may result in disciplinary action being taken.I understand that I must submit work BEFORE the deadline, and that failure to do so will result in capped marks.

1/ a)

Using Traditional Absorption Costing:

Wave Rider (£) Stress Killer (£) Total (£) Sales Revenue 52,500,000 105,000,000 157,500,000 Full Cost of Goods Sold

40,000,000 82,250,000 122,250,000

Gross Profit 12,500,000 22,750,000 35,250,000 Marketing &

Admin Costs:

Variable 6,300,000 12,600,000 18,900,000 Fixed16,000,000

34,900,000

Profit (Loss)350,000

Gross Profit: Sales Revenue – Full Cost of Goods Sold

oFor Wave Rider: 52,500,000 – 40,000,000= 12,500,000

oFor Stress Killer: 105,000,000 – 82,250,000 = 22,750,000

Profit (Loss): Gross Profit – Total Marketing & Admin Costs (Variable +

Fixed) o35,250,000 – 34,900,000 = 350,000

b) Profit Reconciliation

Wave Rider (£) Stress Killer (£) Total (£) Change in Inventory 10(3) Fixed Overhead/Unit

65,625 87,500

Inventory Increase/Release (£)

656,250 262,500 393,750

Change in Inventory: Closing Inventory – Opening Inventory

c) The manager for Wave Rider prefers the Absorption Costing Method

since inventory increases. However, the manager for Stress Killer prefers Variable Costing since inventory decreases

d) - Advantages of Variable Costing:

oIt benefits the managers since the contribution is clearly highlighted – it is an essential decision-making factor.

oIt does not unitize fixed costs – transparent about fixed costs.oTransparent about the overheads – there is nothing hidden in inventory.oLess changes of costs resulting from inventory adjustments – unaffected by these changes.oFuture profits are easier to estimate.

For example: Direct labour costs, raw materials cost used in production,

sales commissions, and cost of utilities.

- Disadvantages of Variable Costing:

oFinancial statements, using variable costing, cannot be used – auditors may reject them; does not comply with GAAP regulations.oDoes not assign fixed costs to product units – revenues can’t be matched to production costs.oIt is not the base for reviewing efficiency of the company.oIt does not give the full view of product costs – partial view only.oNet income under variable costing is reduced – since period costs are used to expense fixed production costs.

- Advantages of Absorption Costing:

oIt gives the fuller view of product costs.oIt complies with GAAP regulations.oAccurate in reporting profits of the business.oTakes into account all of the production costs.

For example: Absorption costing takes into account the fixed costs of

operation, like salaries, rent of facility, and utility bills. This gives a fuller picture of the product line’s cost per unit – efficient for evaluating profitability and deciding product prices.

- Disadvantages of Absorption Costing:

oWhen demand is falling, it can push up inventory at times.oNot good at analysing cost and volume – if fixed costs represent a big portion of total production costs, it will be hard to find out the cost variations that happen at different production levels. It then becomes harder for company management to make the right decisions for operational efficiency – doesn’t improve operational efficiency.